Market Matters Report / Market Matters Weekend Report Sunday 15th September 2019

By Market Matters 15 September 19

Market Matters Weekend Report Sunday 15th September 2019

Market Matters Weekend Report 15th September 2019

On the surface the ASX200 had a relatively quiet week rallying just 22-points /  0.3% but under the hood fireworks were going off in different directions as the value sector staged a fairly dramatic resurgence over the growth stocks. On the sector level we saw strong performances from the influential Banks and Resources while the IT, “Yield Play” and gold stocks came under the pump. Improved rhetoric between the US and China on trade saw a reduced appetite for traditional safety assets such as bonds and gold, the subsequent rally in bond yields had some pundits starting to question if the bottom is in sight, hence we saw monies flow out of sectors which have benefited during the race to the bottom by global interest rates.

It’s important to remember that Growth stocks have outperformed Value continually over the last 5-years, hence one weeks reversion does not create a change in trend. However the comparative  performance  between the value and growth stocks was significant as the relative elastic band appeared to snap, the IT stocks even ignored positive performances from the NASDAQ which previously had been very supportive of our growth names:

Growth Stocks: Appen Ltd  (APX) -16.4%, Wisetech Global (WTC) -8.7% and Xero (XRO) -6.5%.

Value stocks: Fortescue Metals (FMG) +7.6%, Commonwealth Bank (CBA) +3.3% and Sims Metal (SGM) +4%.

We have been extremely concerned for the “go to” high performing stocks over recent weeks and this has now proved warranted but the big question is have bond yields (interest  rates) bottomed, if so this multi-year switch has only just begun. Interestingly it wasn’t just logical rotation between sectors as bond yields bounced, we also saw some pronounced examples of rotation from the “go to” stocks to their out favour peers within the same sectors, for example:

Diversified  Financials: Janus Henderson (JHG) +8.4% and AMP Ltd (AMP) +6.6% respectively while Magellan (MFG) -5.4% and ASX Ltd (ASX) -6.7% as both appeared to experience some profit taking.

Food, beverage & tobacco: Costa Group (CGC) closed up +2.5% while market favourite a2 Milk (A2M) tumbled -9.2%.

Healthcare: Aust Pharma (API) closed up 4.2% while top performer ResMed (RMD) fell -5.2%.

The SPI futures are calling the ASX200 to open down a few points on Monday,  we tend to feel the local market is now approaching / around an inflection point, with a move downside likely to follow but no sell signals have been generated by the index itself, all the action is occurring under the hood.

At MM we remain comfortable adopting a slightly more defensive stance around the current 6600 area.

ASX200 Chart

President Trump had a major week on the popularity front as he appeared to embark on a path to hastily rectify US – China trade issues, in our opinion stocks are now factoring in a successful resolution to next month’s talks in Washington – probably correct but this degree of optimism clearly carries a high degree of risk. A positive outcome on trade should be very bullish for stocks unless we witness a significant kick up in bond yields – as we saw last week only a small bounce last week shook up some local sectors  / stocks.

Technically a break to 3050 by the S&P500 would not surprise while a break of 2940 is required to trigger sell signals i.e.  -2.3% lower.

MM is now 50-50 US stocks in the short-term.

US S&P500 index Chart

Last week I wrote “Our concern towards equities short-term is primarily around the  “go to” group of stocks where we believe the risk / reward  is generally very unattractive”.  Last weeks stock / sector partial unravel didn’t specifically make us any money but we did avoid the pain experienced by many who have sought a home in a very concentrated group of “go to”  companies.  Remember Q4 of 2018 when the momentum players got off the train, it showed how a 20% correction can occur in the blink of an eye, hence last week’s reversion could easily extend over the coming weeks even if bond yields don’t rally much further a crowded position is a dangerous position.

Two great examples are Wisetech (WTC) and  Appen (APX) Ltd  which have already corrected  10.4% and 32% respectively, nothing slow about these corrections. MM is considering WTC below $30 and APX under $21.

MM is considering  buying the Australian growth sector at lower prices.

Wisetech global (WTC) Chart

Appen Ltd (APX) Chart

At MM exited our gold exposure back in early August we’ve  been looking for a decent correction to re-enter the sector i.e. after Friday night weakness the Gold Miners ETF (GDX US) has now corrected 14%. We dipped our toe into the water last week with a small allocation into Evolution (EVN), a touch early in hindsight.

Our preferred new buy into  Mondays anticipated weakness is Newcrest Mining (NCM) around / below $33.

MM likes the gold sector around current levels.

*Watch for alerts.

VanEck Gold Miners  ETF (GDX US) Chart

Last week we saw continuation of the bounce by US 10-year bond yields sending gold lower and more  noticeably the Australian gold sector. The inverse correlation between the two has been very close over the last 12-months hence as we said last week “if you feel bond yields are bottoming don’t buy gold. However at MM we are staying with the mature trend for now hence we see the current move as one to fade, we are looking to buy the gold sector in the coming week. 

Last week we saw the ECB (European Central Bank) cut interest rates to minus -0.5%, the cycle feels mature but we don’t believe it’s over just because the US and China intend to sit down and discuss trade next month. Even if they do achieve a satisfactory resolution a significant amount of concerted effort appears needed by global central banks to lift both inflation and growth.

We continue  to believe the global bond market is potentially becoming a very scary bubble with around $US16 trillion of global bonds now paying a negative yield i.e. investors are guaranteed to lose, there aren’t many things in the finance industry that can be described with the “guaranteed" word. However trends have a habit of last longer than many expect thus we are cautiously bullish bonds / bearish rates from a risk / reward perspective

MM believes the RBA & the US will cut interest rates at least once more in 2019/20.

US 10-year Bond Yield v Gold Chart

1 –  The MM Platinum Portfolio

We’ve continued to follow our plan outlined over recent weeks, skewing the MM Platinum Portfolio to a more defensive stance around the 6600 area basis the ASX200, hence we are now patiently / hoping to buy general market weakness  : https://www.marketmatters.com.au/new-portfolio-csv/

However so far stock / sector rotation has already been significant in September,  we will simply continue to evaluate our positions that are feeling “wrong / tired etc”. Of the 16 stocks we currently hold in the MM Platinum Portfolio the one which that fits this description this week is BlueScope Steel (BSL), happily last weeks candidate Orica (ORI) had a great week testing 4-year highs – the market also bought highly correlated stock Incitec Pivot (IPL).

BSL traded ex-dividend 8c unfranked last week which should have contributed basically zero towards  the weakness in the 2nd half of last week.

MM is monitoring our BSL position closely.

BlueScope Steel (BSL) Chart

On the other side of the ledger a few stocks are approaching our buy zones as aggressive  sector  / stock rotation creates opportunities, the first 3 have been touched on earlier:

1 – Newcrest  Mining (NCM) $33.51 – MM is seriously considering buying NCM around / below the $33 area early next week.

2 – Appen Ltd (APX) – MM likes APX below $21.

3 – Wisetech Global (WTC) – MM likes WTC below $30.

Newcrest Mining (NCM) Chart

4 – Boral Ltd (BLD) $4.83 – Building and constructions companies have  bounced like many underperformers in the last fortnight and we believe more upside is likely. From a risk / reward perspective we like BLD at current levels /  slightly lower.

Our quandary is that we feel a market pullback remains a strong possibility although we have a large cash positions which clearly provides a decent degree of flexibility.

Boral Ltd (BLD) Chart

2 MM Income Portfolio

Still no change last week, with our cash position sitting at 2% : https://www.marketmatters.com.au/new-income-portfolio-csv/

Bond yields continue to bounce but not enough to chance  our view / stance; until we see any indication that bond yields have bottomed MM sees no reason to significantly reduce our market exposure, or re-position / skew holdings towards higher rates i.e. why hold cash in today’s market when yield / incomes your objective.

After last week’s strong performance by the building stocks the main candidate we are considering liquidating at present is Whitehaven Coal (WHC), especially as we continue to only hold 2% in cash.

*Watch for alerts.

Whitehaven Coal (WHC) Chart

3 –  International Equites Portfolio

Our defensive stance  towards global equities still feels ok although it’s not particularly exciting at this point in time. The MM International Portfolio is currently holding 72% in cash, 15% in stocks, 8% short the US index and 5% in a US gold stock (Barrick Gold) : https://www.marketmatters.com.au/new-international-portfolio/

I know it feels boring but we have been patient so far and today this still feel this is the logical path while identifying some stocks to buy into weakness e.g.  Asian facing companies like Alibaba (BABA), quality “blue chips” like Microsoft (MSFT US) plus other names that may get sold off too aggressively if we get another leg down in risk assets.

However one stock we do continue to like at current levels is Bank of America (BAC US), we now feel comfortable adding this to the portfolio as we are holding an increased short S&P500 ETF position.

*Watch for alerts.

Bank of America (BAC US) Chart

4 - MM Global ETF Portfolio

Again no major change from last week with MM’s new Global ETF Portfolio -  we are now holding 4 positions, long the $A, silver and gold, plus we have a short US equities position leaving us holding 72% in cash : https://www.marketmatters.com.au/new-global-portfolio/

Construction of this portfolio, similar to our International Portfolio, has been slow but opportunities are starting to present themselves. MM is now anticipating averaging our long $A position: the little “Aussie  Battler” is holding up well with so much recession talk around, hence we are getting closer by the day to averaging our long position i.e. buy AUDS AU.

*Watch for alerts.

Australian Dollar ($A) Chart

Conclusion

We have structured or portfolios with a more conservative bias with the ASX200 in the 6600 area, we have been expecting a decent correction to the index but so far it’s only been sector / stock specific as investors desert the “go to”, growth, gold and  “yield play” stocks. MM happily has no exposure to this group, except a small position in Evolution Mining (EVN) initated recently hence another bad week may to see us buying into some weakness.

The banks and resources  look great and as they make up a huge percentage of the ASX200 perhaps the index will remain firm – we must stay open-minded.

*Watch for alerts.

Chart of the week.

We have been watching the building stocks closely over  the last few weeks and it “feels” like we may have cut our losses in Adelaide Brighton too early, or late depending how you view it! James Hardie  (JHX) looks poised to pullback towards  $22, a 6% correction. This technical set up is likely to leave MM being patient with our potential purchase of Boral Ltd  (BLD).

MM expects JHX to pullback towards  $22 before rallying to fresh all-time highs.

James Hardie (JHX) Chart

Investment of the week.

It now appears that our sale of Bank of Queensland (BOQ) was premature, the banks look great – fortunately we still have significant positions in both our Platinum & Income Portfolios e.g.  today the “Big 4 Banks” make up 20.7% of the ASX200 but we hold 23% of the Platinum Portfolio across ANZ, CBA and WBC.

MM now likes the banking sector into a 2-3% correction.

Commonwealth Bank (CBA) Chart

Trade of the week.

Janus Henderson (JHG) has been a thorn in the  Platinum Portfolio ever since BREXIT raised its messy head. However as the UK is being forced into a conclusion, not that I’m sure actually what it is just yet, investors are returning to stocks exposed to the region. JHG looks destined to trade  over $35, shame we already have a large enough exposure.

MM likes JHG for at least 10% upside.

Janus Henderson (JHG) Chart

Our Holdings

Our positions as of Friday. All past activity can also be viewed on the website through this link.

Weekend Chart Pack

The weekend report includes a vast number of charts covering both domestic and international markets, including stock, indices, interest rates, currencies, sectors and more. This is the engine room of our weekend analysis. We encourage subscribers to utilise this resource which is available by clicking below.

Have a great day!

James & the Market Matters Team

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.

Disclaimer

All figures contained from sources believed to be accurate.  Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy.  Prices as at 14/09/2019

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